Whole Life with Massmutual Good Idea?

[VolAgent]

Volagent, thanks for elaborating on the income need. How do life insurance agents determine the amount of insurance someone like me needs?
I'm still confused about the front loaded stuff. How can the cash not be there to begin with and then suddenly appear later?

Several ways really, which ever way fits the agent's style or objectives.

Mine is to add up all your "liabilities" and then see how much was needed immediately in capital and then how much was needed to produce an ongoing income stream. Typically you use conservative numbers as the courts frown upon putting widows in aggressive investments.

So you would pay off all debt, set aside money for college for the kids, and then see how much income you wanted for the wife and for how long. From that it was pretty easy to see how much life insurance was needed. Also, you may or may not want to account for inflation.

The number is almost always way more than the person thought going in. They might think 250,000 is more than enough, turns out they needed 2 million. Obviously each case is different, but I really can't remember anyone who would sit down that didn't need more insurance.

 

[LGilmore]

mec. yup. Basically changes your life insurance cash values into an IRA for tax and tax penalty purposes. There are ways to avoid this from adding a term rider to the policy to simply surrendering some cash values when needed.

I have always found it interesting that whole life needs the mec provision from the government if it's such a bad place to be...

 

[BNTRS]

there was something that said whole life got stronger as it gets older, what does that mean?

The longer you keep the contract, the more cash builds. Dividends paid becomes more and more, and death benefits continue to increase. Another common discussion for permanent life insurance is the use to enable yourself the opportunity to spend down other assets (like your 401k and IRA assets) and use your whole life policy as a back board to both provide cash and death benefit to refill your depleted assets. It's a lengthy discussion that goes a little beyond the topic at hand.

in several discussions about this. I also notice that you've strongly recommended Guardian's 10 Pay. Do you still? How is it different from Massmutual?

I still like it, however improvements with other companies make it less of a stand out from where it was a few years ago. There's another issue that has driven me further away from Guardian that has to do with a customer service issue. I can't really detail publicly at this time.

I really started to question him when he told me Massmutual was going to pay me 7% per year as that was their dividend rate.

TIME OUT.

No, the dividend rate is not the amount that Mass is gong to pay you. Further, it's not even the dividend rate. It's the dividend interest rate. All it refers to is the amount of the dividend that company's investments performance is kicking towards the overall dividend. You can't use it compare different companies dividend as their is no one way to allocate funds for the purpose of paying a dividend, and the dividend interest rate is only 1 of 3 components. You likely did nothing wrong in terms of calculating the rate of return. You're agent is the one who is making the mistake.

I know that a lot of you have told me this is works, but no one has really elaborated on this "banking" thing. How does that work?

The whole concept is based on the fact that when you take a policy loan from an insurance contract, the money doesn't actually come out of the policy itself. Instead the money is a loan made from the insurance company. The cash in the policy stays put and continues to grow (earn dividends).

Here let me drop another shameless link: about dividends

It certainly works. It's perhaps has some nuance to it, but once you've grasped the concept it's pretty simply and very solid.

 

[Sailerdude78]

Thanks again, everyone. Life's been somewhat crazy and I haven't had time to look at a lot of this.

I'm amazed at how a lot of people here seem to be much more capable of explaining this stuff than my current agent. A little more information, I originally started out looking for insurance based on my assumption that I needed more, and my interest in pursuing this banking idea. The guy I've been talking to actually fought with me a bit about how I should go about doing this. He basically told me I needed to put 10% of my income into whole life insurance and in a few years I'd never regret it. When I asked him about the Nash book he basically said his recommendation was better. He pushed on with a few presentations. I think he has designed this more towards the banking idea, but I'm not really sure.

Volagent, thanks for the explanation on how much life insurance is needed. I hadn't thought about producing income with the money, and also hadn't thought about producing income with conservative assets. Now that I think about it, $500,000 doesn't seem like it would achieve this.

Lgilmore, thanks for confirming the MEC thing. I still don't get it, but I guess it's a bad thing that I want to avoid. How will I know?

BNTRS, If I'm not getting 7%, what am I getting? What does the 7% refer to? You said it's not the "the" dividend rate. What is?

I did have time to read through Nash's book. I'm not so sure it really left with a lot of answers. If anyone could break down how this is supposed to work. I'd be incredibly grateful. If you guys aren't all that familiar with it, that's okay. You've all helped a lot all ready. Maybe I should buy the other book from Pam Yellen?

Also, to the other person who sent me a message. I can't reply because I don't have enough posts.

 

[BeeSelective]

II'm a broker with them,
That's not a terrible thing, but when cash value is a big discussion, Paid-up Additions as Norway guy pointed out, are hugely important. I do a ton of this stuff, and the problem I run into regarding Mass is their extremely inflexible PUA rider (they call is the ALIR or Additional Life Insurance Rider). You basically choose an amount and at issue and can only increase it by 3% per year and you have a 3 year catch up (i.e. if you choose not to increase it for two years, they'll let you make it up and carry on). You can decrease the amount down to $300/year and then make up the former amount for 3 years (if you don't that $300 becomes the new amount increasing at 3%/year).

Complications things by including PUon the policy with PUA rider that blends the policy to get more coverage for less money.

I "assume" the OP was going to buy a policy, full premium, no PUA rider. Otherwise, it is not so good.

If you need $500,000 of life insurance and can pay whole life premiums, do it. It is good if you do.

However, use insurance for insurance needs and investments for investment needs. Life insurance to serve short term needs for savings is probably not a good idea.

 

[BNTRS]

The guy I've been talking to actually fought with me a bit about how I should go about doing this. He basically told me I needed to put 10% of my income into whole life insurance and in a few years I'd never regret it. When I asked him about the Nash book he basically said his recommendation was better.

Is this guy a CLU? I'm not knocking the designation (I think it's a great thing) but this is an old (like oooold) school insurance philosophy. Put all your money into a base whole life premium? Yeah that's better than blending...for someone.

BNTRS, If I'm not getting 7%, what am I getting? What does the 7% refer to? You said it's not the "the" dividend rate. What is?

While it's true that in most cases the dividend interest rate drives the overall dividend performance. It's not a comparison like: Mass is at 7% and Ohio National is at 6.15% and so Mass is better. The percentage is based off the policies terminal reserve, and you and I will not know what this number (the terminal reserve) actually is. It's typically close to the cash surrender value, but not exact.

There are other factors to the dividend, like mortality and expense factors (did the insurance company remain under budget for what it spent for the year on acquiring business).

So realistically, the only really useful thing you can do with a dividend interest rate, is compare it to historical performance at the same company to see how they have managed with respect to increasing or decreasing their dividend.

Again, Mass is a good company with a strong history on competitive cash value performance. Their PUA rider is rigid, and that makes the overfunding part much less flexible. It's something a lot of the non-direct recognition companies do.

 

[timcomp]

Thanks again, everyone. Life's been somewhat crazy and I haven't had time to look at a lot of this.

I'm amazed at how a lot of people here seem to be much more capable of explaining this stuff than my current agent. A little more information, I originally started out looking for insurance based on my assumption that I needed more, and my interest in pursuing this banking idea. The guy I've been talking to actually fought with me a bit about how I should go about doing this. He basically told me I needed to put 10% of my income into whole life insurance and in a few years I'd never regret it. When I asked him about the Nash book he basically said his recommendation was better. He pushed on with a few presentations. I think he has designed this more towards the banking idea, but I'm not really sure.

Volagent, thanks for the explanation on how much life insurance is needed. I hadn't thought about producing income with the money, and also hadn't thought about producing income with conservative assets. Now that I think about it, $500,000 doesn't seem like it would achieve this.

Lgilmore, thanks for confirming the MEC thing. I still don't get it, but I guess it's a bad thing that I want to avoid. How will I know?

BNTRS, If I'm not getting 7%, what am I getting? What does the 7% refer to? You said it's not the "the" dividend rate. What is?

I did have time to read through Nash's book. I'm not so sure it really left with a lot of answers. If anyone could break down how this is supposed to work. I'd be incredibly grateful. If you guys aren't all that familiar with it, that's okay. You've all helped a lot all ready. Maybe I should buy the other book from Pam Yellen?

Also, to the other person who sent me a message. I can't reply because I don't have enough posts.

A person overfunds (puts additional premium) into a participating (dividend paying) whole life contract so that he or she can build tax deferred funds to create a source for a loan 10 or 15 or x number of years in the future. The overfunding entails blending the amount of base whole life with a paid up additions rider (PUAR) to maximum dividends while paying a premium that remains under the modified endowment contract (MEC) premium. A non-MEC policy preserves the tax deferred status and facilitates taking the loan(s) in the later policy years.
The payor pays premiums and receives dividends. After x number of years, the owner\payor take(s) a loan(s) against the policy cash value (enhanced by the dividends) to purchase a big ticket item. This loan only requires that the owner\payor complete a loan request, rather than going to a financial institution that will examine the owner\payor's financials (and possibly deny the loan). The loan from the policy will not require any regular repayments. When and if repayments occur, the repayments rebuild the policy cash value and death benefit.

 

[InsuranceCat]

Disclosure, I am an insurance agent not appointed with Massmutual. I am appointed with a large stable public company known for their indexed universal life products. This is neither tax advice nor investment advice, please seek the appropriate professionals for advice. I am also not licensed in variable products and my mention is only regarding an academic discussion of cash value.

Dividend paying participating whole life works really well in upward-sloping yield curve interest rate environments. They also work well with large mutual companies such as Massmutual where the agents in the field are consistently able to generate new contracts at a low cost and the fixed-income investment environment is favorable. In this respect, the policyholder is going with the company as both a policyholder and part owner and thus shares in the success (and non-success) of the company.

The MEC concept is interesting. It is because the US Federal Government does not want to miss out on taxing income generated in life insurance contracts while the insured is still living. It came about back when prime interest rates were 12+%. Money grows in an insurance contract (life and annuity) without generating taxable events. A properly structured life insurance contract as defined under Internal Revenue Circular 7702 allows for money to be taken out tax-free if it is a non-MEC contract. If the contract is a MEC, the gains *if the insured is taking out the money while living* (money paid out after the original premium has been withdrawn) are taxed in a way similar to that of an annuity.

Sometimes the insured would purposefully create a MEC contract. This is because they want to do a single premium life. Lets say grandma (60F healthiest non-smoker) wants to give her four grandchildren $40k in total. She could buy a single premium life contract for one premium payment of $40k that will pay out ~$108k in initial coverage (even day 1). If she were to pass on at age 90, the tax-free death benefit would have been about $350k if history repeats itself under this indexed UL. Lets say grandma is still around at 90 and wants $40k to cover some expenses, lets say a cruise with her favorite grandchildren. She can take it out out of the cash value tax free (up to the amount of the original premium). The IRS did not want to penalize grandma. The IRS does want to tax money withdrawn from contracts that do not have the "character" of life insurance contracts (basically people who want to bypass taxes and had no intention of life insurance). If grandma bought the single premium contract before the MEC ruling, then her contract would have been grandfathered. Where people sometimes inadvertently run into MEC is when they accidentally ratchet down their coverage levels excessively when the policy is in force. Also of note, grandma is not borrowing or touching the death benefit (accelerated benefits). She is accessing the cash value. This MEC special definition applies both to policy loans and withdrawals (sometimes referred to as partial surrenders).

Another time people purposefully do a MEC contract is because the growth potential may be higher for a healthy individual to buy a life insurance contract rather than an annuity. This is especially true in estate-transfer cases, however even losing the tax-free status the tax-deferred cash-value growth is in some cases higher than taxes and mortality charges, enough to offset the expense.

I also want to answer your question about where the cash value comes from. Where it comes from is from whatever excess is left over from the premium after charges and deductions take out their bite, after you incorporate back whatever interest or investment gains (or losses if it is a variable contract) are made. When you look at an illustration you will see what happens to cash value over time. Whole life insurance is mostly about cash value and death benefit. I am assuming you are not talking about a variable contract so you can ignore the investment losses. Cash value is also important because it allows the policyholder to move to another insurance company, lets say if another company 15 years from now better suits your needs.

Also a discussion regarding agents, each agent has their own philosophy about the economy, future prospects, and even the sales process. This is a trust business. So find an agent that you trust and speaks the language that you trust. If your an engineer, find one that has an engineering background too. Talk IRRs.

 

[Kenek]

For a quick calculation of your life insurance needs, place your specific dollar amounts next to the following data points:

1. Mortgage
2. All other debt
3. Education fund for current and future children
4. Final expenses
5. Multiple of income - 10x is a great start

Most people (and most agents, unfortunately) have no clue as to how much they truly need. The average policyowner typically has around $150k, and there is no way you can apply the above fact-finding and get to $150k. (Unless they are young and single or elderly and retired.)

It's all well and good you have some insurance through your employer, but get a policy that YOU own. You won't be working for the same company the rest of your career, and your next employer may not offer the same benefits.

FWIW, the 9/11 Victims' Compensation Fund issued around $2,000,000 to each of the families who lost a loved one on that day. That amount was determined by applying the Human Life Value theory (what a person is worth over a lifetime). That $2,000,000 worked out to something like 17x annual salary, so the 10x that has been mentioned is actually on the low end of the scale. You are worth much more than you think you are at this stage of your life.
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Here is a link to a HLV calculator:


LIFE Foundation | Human Life Value Calculator


It's always an eye-opener to see how much we are worth.....

 

[Tom Clements]

Nobody told you the benefit of cash value vs term and invest the rest. If you invest the rest into traditional investment activities, come distribution time you are going to be taxed at whatever tax rate at the time of distribution. (With our current debt do you think taxes will be higher or lower when you retire). So in essence, your growth, when comparing to the cash value in the policy will need to grow more than 150% in traditional investments. The loan provisions for most whole life policies (if structured correctly), will not be taxable. What a lot of folks do is supplement their retirement distributions with this loan provision. If the market tanks, the following year you will only take the minimum distribution from your retirement funds and fund your retirement on the loan provision for these years. This one activity will exponentially extend the life of your 401k.

Also financial people will tell you there are too many fees in insurance. Ask your financial person how they afford to pay their personal mortgage...Its from fees from their clients...